Middlesex Consulting Insights

How To Maximize Service Contract Renewals

Sam Klaidman - Monday, May 15, 2017

This post was adapted from an article written by Sam Klaidman and Dennis Gershowitz that originally appeared in the September 2009 edition of the AFSMI Sbusiness News (no longer published).

ExpiredEver wonder why people fail to renew an existing service contract?  Looking for the right actions to take to preserve and grow your revenue stream?  Then look no further. This post will identify the reasons that customer’s buy and renew service contracts and also the nine most important reasons why they do not renew and what you can do to minimize this churn.

Why people buy service contracts

One prerequisite for selling contracts and anything else is that it must offer value to the purchaser.  If there is insufficient real or perceived value, it will not be purchased.  Our research indicates that most contracts are purchased or renewed for one of these reasons:

  1. To reduce hassle - “One call, and the service organization owns the problem.” 

  2. To maximize equipment uptime - “The service organization keeps my equipment operational and available.” 

  3. Predictable expenses - “I will never exceed my budget with your service organization.” 

  4. Peace of mind - “The service organization has my back covered.”

Why people do not renew a service contract

Here are six reasons that are mostly within your control that cause you to lose contract renewals:

1. You fail to deliver on your value proposition.  This frequently happens with very reliable equipment coupled with few, if any, value-added services.  The contract is perceived as an insurance policy with a low likelihood of being cashed in.  We hear comments like, “If I would have known the equipment was so reliable, I would never have purchased the contract.”

To avoid this situation, make sure your contract is valuable, especially if the equipment is very reliable.  There are two ways you can do so:

  • Make sure your contract marketing documentation includes all services provided.  For instance, if you offer free telephone support, make sure this is clearly stated.  The same with any other services. 

  • Include services available only to contract customers or to non-customers at a premium cost.  For example, include priority telephone response with the contract and sell the enhanced response for a higher price to increase the value of the contract.  Same thing with priority parts availability, rapid on-site response, and so forth. 

2. Competition offers a similar contract at a lower price or you are not consistently exceeding your customer’s expectations or building loyalty.  When a company’s experiences meet expectations, they purchase on price.  But when their expectations are exceeded, they purchase on value.  You should be continually demonstrating value to protect your business.

To avoid this dilemma, monitor two factors:

  • How your customers rate your business.  What is important to them, and how successful are you in delivering against their expectations?  Focus on key drivers to impact current service business and future sales. 

  • Your competitive landscape.  Are your competitors offering multi-vendor service (very common in the healthcare, instrumentation, and data communications industries)?  Are other software providers moving to the software as a service (SaaS) model? You must strengthen your delivery processes and evaluate the opportunity to enter the multi-vendor service or SaaS arena.  This is not a decision to be taken lightly, but nor should it be the result of a multi-year study.  Evaluate, make a business case, and decide quickly but thoughtfully. 

3. Too much hassle.  Customers want their service provider to take full responsibility for quickly solving their problem.  For them, managing the resolution process is a real hassle.  Forcing customers to do what they perceive as your job equates to low performance against expectations.

You can find out if your processes and people are letting your customers down through transaction surveys.  You will quickly learn if they are happy or if you need to redesign processes, retrain or replace people, or both.

4. Uptime fails to meet expectations.  Frequently when people recommend the purchase of capital equipment (hardware and/or software), they feel as though they are playing a game of “You Bet Your Job.”  If their recommendation is accepted and the equipment fails expectations, then at best, they used bad judgment and could lose their job.  Customers protect themselves by purchasing a contract.  If you do not help them meet the CapEx assumptions, they have choices:

  • Self-maintenance.

  • Third party.

  • Time and materials.

  • Scrap the product (the most drastic and least likely choice—barring the semiconductor industry.)

Your contract should include an uptime expectation.  Every service organization should be monitoring their contract customer’s uptime.  If there is unreasonable downtime, take the responsibility to identify the root cause for a solution.  We know of one company that actually replaced a piece of equipment worth several hundred thousand dollars because it was unreliable.  It was returned and completely diagnosed.  The outcomes were:

  • A delighted customer.

  • An opportunity to identify and repair the root cause of the failure.

  • A great story to use with prospects.

  • A demonstration of contract commitment.

  • An opportunity to educate and motivate employees. 

When you are putting together the terms, conditions, and deliverables of the agreement with your customers, keep in mind that meeting or exceeding these expectations measures success.  It is better to consider what you can deliver, and then exceed those expectations. 

5. Your service contract requires unplanned (and unbudgeted) expenditures.  Contracts may not cover all possible expenses.  And the buyer of the contract may not always be aware of certain limitations (who really reads all the fine print?). 

When designing service contracts, carefully evaluate the value proposition and any deviations that will adversely affect the customer.  Make sure that the cost/benefits of exclusions exceed the emotional downsides of your decision.  Any exclusion must be clearly articulated.  You must be able to do this, and they must “pass the smell test – if it stinks don’t do it” 

6. You dropped the ball and did not deliver peace of mind. 

Your customer lost confidence in your ability to fulfill the terms (both written and implied) of the contract. 

This is an emotional situation that’s difficult to rectify.  When it happens, it is critical that all efforts be made to correct the situation.  Unless the organization learns where and why it dropped the ball, it will continue and like a stone rolling downhill, it will accelerate with time, since it is the beginning of a downward spiral: lose revenue → cut costs (people) → lose more revenue. 

Bang head against brick wallThree reasons for failure to renew service contracts that are beyond the service provider’s control

In addition to the reasons within your control that customers do not renew a service contract, there are three additional reasons why people do not renew. 

1. Going out of business.  If your front-line support or your accounts receivables department is in contact with your customers, then this should not come as a surprise.  Internal customer employees know when workloads and equipment utilization are decreasing.  They are very good at reading the tea leaves and assessing the situation.  This does not have to be a loss, but it can generate additional business.  If a customer is forced to liquidate, there is a good possibility that the equipment will be sold. 

Make sure you have equipment history records, keep track of the purchaser, and offer to de-install the equipment (if appropriate), move it to the new location, reinstall it, train the new operators, and place it under contract.  If you are managing a single territory or country, you may lose the service revenue.  If you do your job well, someone in your company will enjoy the long-term benefits.

2. Downsizing or closing the operation or project. Perhaps this results in mothballing or selling the equipment. This is very similar to “going out of business,” except the company is still obligated to fulfill its contracts. 

If your equipment is taken out of service, make a relationship-vs.-money decision. Do you want to void the contract and earn goodwill with the business?  You may also make some form of pro-rata adjustment for the balance due, or you can take a hard line and demand full payment for the term balance.  This last action helps your financial results for the short term and may earn you internal respect for your business acumen, but it may turn the company or its employees against you.  There is no correct answer.  It depends on the factors involved.  Remember, if you work in a limited marketplace, the people you are working with may relocate and become your customer again. 

3. Corporate mandate goes into effect to cancel service contracts.  This is a typical cost-cutting, knee-jerk reaction, along with travel and wage freezes, reducing employee education, and other measures. 

This situation is possibly the most difficult to navigate.  If your customer believes the situation is “temporary,” you must decide what benefits of the contract you will pass along while they are on a pay-as-you-go scheme.  You want to demonstrate continuing support, but you do not want to deliver such a high level of service that the customer does not reinstate the contract when the corporate mandate is lifted.  And of course, you have to make the same decision when the customer downsizes.  Do you suspend the contract, prorate it, cancel it (with or without penalties), or negotiate an extended or deferred payment scheme? 


In the long run, it is the responsibility of the service organization’s management team to make sure that it is doing everything it can to prevent losing customers.  It is a shame to lose the contract because the organization did not execute the plan. 
Finally, if the organization drops the ball, then treat the customer as you would want to be treated.  Do what’s right.  It may not always save the customer, but it will send a message to the organization that its promises matter. 

The Three Primary Jobs Of Business Leaders

Sam Klaidman - Monday, May 01, 2017

We are all trying to improve how we do our jobs.  That is just the way we are programmed.  And if part or most of our job involves dealing with customers, we then have an extra challenge – figuring out what they are trying to accomplish. Harvard Professor Clayton Christensen calls this “the job-to-be-done.”  

We will not be successful in creating, designing, and commercializing new services until we can communicate how they will help our prospects and customers improve the outcomes of their jobs.


We define customer value as the tangible and/or emotional net improvements (benefits minus costs) to customer outcomes resulting from using or owning the supplier’s products and/or services, compared to all alternatives.


We created this graphic to help us all understand the high level jobs that each level of worker in an organization is tasked with:

Employee level and responsibilities

Since this blog is aimed towards B2B, capital equipment service providers, I will focus the rest of this post on that group.

When we sell our traditional services, we generally sell to lower level employees while strategic services usually involve someone in the C-suite.  For example:

This is important since by understanding what each person’s responsibilities are, you can define and communicate your services while shining the spotlight of what each person considers essential.  

Selling to the first two levels is business as usual.  By now you know how to sell these basic services since they are today’s bread and butter products.  But things are different when selling to the C-Suite.  Fortunately, this diagram shows that creating customer value is the answer, although the implementation is really challenging.

Think about the definition of customer value that I showed you at the top of this post.  Creating customer value helps the C-Suite achieve their top three objectives.  

Mission ImpossibleSo, your mission is to create value for your prospects and then to communicate that value clearly and accurately.  I will not dwell on customer value creation here… it is too big a subject.  But I will pass along a warning about communicating the value you are prepared to create.

The following quote is from a CustomerCentric Selling blog titled Sales Tips: WHY Should Buyers Buy from You?

“Most buyers will take the “value proposition” savings and cut them in half because sellers are often guilty of hyping offerings.  

Dependent upon the offerings, some buyers will double costs because if any implementation effort is necessary, it always takes longer than expected.  In such cases, this means that sellers and buyers are off by a factor of 400%!"

What many sellers do when preparing proposals for deals worth at least $500,000 is hire an independent consultant to audit the value proposition assumptions and calculations.  Like a CPA’s financial report audit statement, they certify that, in their opinion, the information presented is accurate.  At least this approach will reduce the potential gap from 400% to something that leaves your proposal still reasonable and hence reduces the likelihood that the buyer does nothing!


As you sell higher up the food chain, you must focus on creating value for your customers.  And the three outcomes the C-Suite values are growing revenue, cost reduction, and risk mitigation.

7 Reasons New Services Fail

Sam Klaidman - Monday, April 17, 2017

For service executives, the good news is that new product introductions fail more frequently than new service introductions,  especially after we exclude the services associated with the failed new products.  Even better news is the cost of developing the new service is generally less than the cost of developing new products.  However, the bad news for the service executive whose new service was a dud or hasn’t attained it’s full potential is that it is easy to prevent the failure in the first place.

What is a new product failure?

R. G. Cooper is quoted as saying

“about half of all resources allocated to product development and commercialization in the U.S. goes to products that a firm cancels or produce an inadequate financial return.” 

Others estimate that between 20% and 35% of new product projects either get killed before they are launched or never produce a significant return.  Since the number of new services that fail is a smaller number than failed products, the best we can say is that new services generally cover their development costs (usually relatively low).  However, in our experience, the number of “successful” service products that fail to achieve their full earning potential is high.  That is the same as the #1 NFL draft choice that, after five years on a professional team, is still the third string quarterback.  He certainly failed to live up to expectations!

Why Products and Services Fail

In a recent Uservoice.com blog post, the author listed the seven reasons why new products fail. Here is the list with a comparison with why new services fail:

Why new products and services fail

Notice anything special?  Right…the causes of new product and services failure are exactly the same.  That is because both categories are actually products, frequently managed by product managers and subject to the same market issues.  However, there is one one major difference, as shown in the following table, from the most recent CMO semi-annual survey.  The percent of companies budgeting market research for B2B products is 44.5% while the same metric for B2B services is 37.0%.  (20% more products businesses budget for market research than do service businesses.)

What's in your marketing budget?

We can shorten the list of reasons for failed services down to three key items:

  1. Not properly defining the service (wrong needs and wants) for each of your key markets

  2. Incorrect pricing

  3. Customers don’t think you can deliver what you are promising

Not properly defining the service (wrong needs and wants) for each of your key markets

This point incorporates two concepts - identifying each unique market and then defining what each need and want.  Here are two examples from my background. 

When I was heading up customer service in the data communication industry, all of our customers needed high uptime.  But some were more critical than others.  For example, the New York Stock Exchange could not tolerate more that 20 minutes of network downtime during the trading day cumulatively for a calendar year.  Money was almost no object for them to ensure their network was always available.

When I moved to the analytical instruments industry, I discovered that academic customers had very different support requirements then QC groups in manufacturing.  They each had unique needs, with very different response times and very different budgets.

As in many things in business, customer needs and wants change over time.  If it has been more than four to five years since you reviewed how you map your customers into segments and how you structure your service contract components for each, you are probably not maximizing your capture rate and revenue. 

Incorrect pricing

If you are not updating your customer segments and contract content, then it is highly likely that you are also mispricing your services.  Willingness to pay does not increase linearly with contract level.  It increases with the value your customers perceive they will obtain from the purchase.  You can only know this by understanding your customer’s business.

The other thing you should be doing is seeing how your prices compare to other services your customer’s purchase from other companies.  If you are selling into a manufacturing environment, then you should know not only what your competitors charge for their services on equipment similar to yours but also what other manufacturers charge for similar services on all sorts of equipment.

Think about how hard it will be sell your service if your customer has 15 different pieces of equipment and the hourly price for on-site service from the other 14 suppliers ranges from $225 to $275 per hour and you charge $375.  Or, in the same example, how much you are leaving on the table if you only charge $175 per hour.

Customers don’t think you can deliver what you are promising 

In some cases, the end user will still buy a service contract from you because she has to demonstrate to the organization that she is doing everything possible to keep all the equipment running.  But many others will either migrate to self-maintenance or have a Plan-B when they call you and you disappoint, so that they are not caught short.  In any case, you are not doing your company or your department any favors but selling expectations you cannot achieve and you have a high probably of losing customers as soon as they can dump your stuff.

How do you resolve each of these three questions?

Not properly defining the service (wrong needs and wants) for each of your key markets – work with a service marketing consultant to help identify the key segments and then do a market research survey to answer all the questions you have about services, pricing and perception of service capabilities.  It is not as expensive as it sounds and most companies can afford a project without destroying their budget.

Incorrect pricing – your first choice should be to ask your sales people.  If they quote your services while trying to sell products then they most probably have a very good idea about how much each of your major competitors are charging for their services. As a backup, the market research program can also help you understand what your customers are paying others and what they think is reasonable to pay for your services.

Customers don’t think you can deliver what you are promising – If you have an ongoing customer satisfaction program, then you should already know what your customers think about your service.  Also, ask your sales people.  Customers tell them what they think!  And finally, this should also be part of the market research survey.

If you believe that your business would benefit from this type of market research program, then contact Sam to discuss the Middlesex Consulting Customer Focused Market Testing methodology.  And remember that every day you delay you are leaving money on the table which can never be recovered.

When Complexity Is Your Friend

Sam Klaidman - Monday, April 03, 2017

In the past, I have written about complexity and all the damage it does.  I still believe everything I wrote but I now understand that there are some times when complexity is an ally.  Before I explain my new thinking, let’s define complexity.

According to Wikipedia, 

“Complexity is generally used to characterize something with many parts where those parts interact with each other in multiple ways, culminating in a higher order of emergence greater than the sum of its parts.  Just like there is no absolute definition of "intelligence,” there is no absolute definition of complexity.”

What all this means is that complexity exists in the mind of the person thinking about it.  This is just like customer value and customer experience.  And just like those two ideas, complexity depends on the context.  Here is an example of what I mean by context:

Pasta in Bowls

When is a complex situation good for you?

There are two examples that come to mind:

1. You are selling something that is perceived by buyers as being a commodity.
2. Your prospect is happy with their status quo but you think you can add much more value because of your situation.

Both examples are very similar because the prospect does not want to buy from you or anyone else.  They are happy to continue doing what they always did.  If you think this is unusual, you are greatly mistaken.  In 2015, according to SBI, 58% of a typical B2B sales pipeline ended in “no decision.”  

The results of a recent survey conducted by Blumberg Advisory Group and Giuntini and Company indicate that only 30% of companies have achieved service contract attachment rates of 50% or more.  And 16.7% have achieved attachment rates of 70% or better.  I know that mission critical equipment in high-risk businesses have a high probably of achieving greater that a 60% contract capture rate.  Examples are medical imaging systems and networks handling high volume retail or financial transactions.  So, in most cases where a customer does not buy your contract offering, the customer is content to call you for help and pay on a time and material basis.  This is when complexity can become your friend.

If we assume that most business buyers are rational, then the reason they do not buy from you or someone else is that no one offered a good enough value proposition.  That means that the benefits received do not exceed all the costs involved in the purchase in a way to make the purchase worthwhile.  I believe it is also safe to assume that all businesses have a degree of complexity that gets tougher to deal with every year, Work forces change, regulations change, employee skills change, and interests change.  Therefore, you should take the opportunity to spend time with your customer and not only observe how your product is used but what is impacted if it fails or is out of service for an extended time.

Some customers have multiple pieces of equipment that can do the same job but they must first document the fact that the alternate equipment will produce the same results as the original one.  In some manufacturing plants, they maintain a large amount of work-in-process inventory to cover equipment failures or material problems.  Once they stock is consumed, they may have to shut down their production line andin that case, it is your job to find out how much the inventory costs and how much it costs in both lost production and stress for your customer.  (As you know, pressure flows down hill.)

If you or a team spend the necessary time with your customers, you are likely to uncover opportunities to make a complex situation simpler or less expensive.  This means you will be creating customer value at a relative low cost because the service contract is much less expensive than the equipment cost.  Your customer wins because she gets better support and can reduce current in-house costs and your company wins because you sell another contract, improve another relationship, and create a happier customer.

The Secrets Of Closing A B2B Sale

Sam Klaidman - Monday, March 20, 2017

If you are responsible for growing your service business, you are in Sales.  Maybe not product sales but certainly you are selling services.  Also, you probably depend on the sales organization to initially sell service contracts, or other services, along with the product.  So, for these two reasons, you had better understand what B2B selling actually means in the late 2010’s (i.e., NOW!).

You Bet Your Job

You Bet Your JobThe first thing you must internalize is that the buyer, or the buying committee, is risk adverse.  A large part of the buying decision is based on mitigating risk for the people involved in the purchase decision and the business.  IDC recently shared some data that indicated that 28% of C-Suite executives rate risk avoidance as their number one objective.  

When I have one-on-one talks with decision makers, they say that they feel that when making some purchasing decisions, their job is on the line.  They feel they will get fired, or at least have their career put on hold, if the decision yields a bad result!  I modified this “ancient” television sign to update it to current norms.

Once you internalize what the buyers are feeling, you can move on to the four things you must do to help them and your business.

Create Customer Value 

Without getting theoretical or philosophical, I will state with absolute certainty that no one will purchase anything unless she receives benefits worth more that they cost.  The benefits can be quantifiable, i.e., reduce cost, grow revenue, or improve products or processes, or they can be emotional, i.e. save time, improve experience, or rebuild the company’s image in the marketplace.  

It is critical to recognize that the actual value you and your business create only exist in the mind of the buyer.  If your service increases equipment uptime, you can suggest the financial benefit but only the buyer can assign a benefit that is valid for the purchasing company at the time of the assessment.  

Because situations constantly change, the benefit also changes.  For example, if you are selling a widget that increases production by 10% per day and the company already has a large inventory of the item and orders are dribbling in, then your widget is not very valuable.  But, if the next day the widget is highlighted at a National trade show and the video of the demo goes viral, the buyer may need to purchase two or more widgets from you.

Value is also relative to all other options.  If your widget increases the customer’s output by the same 10% per day as above, and a competitor offers their widget+ which increases output by 15% and costs 5% less than your widget, then all other things being equal, your product is essentially worthless to that buyer!

Earn Short-Term Trust

Trust is a strange emotion.  There are many books that tell you how to create trust but emotions, like value, depend on the current circumstances and I just do not trust (sorry for the pun) a book to be able to deal with the range of human emotions.

The reason that earning the buyer’s trust is so important is you need them to carry your message throughout their individual organizations and you are asking them to place their jobs at risk.  They will only carry the message if they have complete confidence that you are telling the whole truth and that the benefits you and they jointly develop are safe.

It is not unusual with very large proposals for the seller to hire an independent third party to confirm all the assumptions and understandings and to calculate the benefits and return on investment (ROI).  The seal of approval, plus all the trust you created during the early selling process, work together to create enough trust for the buyers to want to move forward.

Build Long-Term Trust

This is different from short-term trust.  This is all about giving your prospect the confidence that your business will be viable during the complete lifecycle of your product.

Q. How long can a piece of B2B capital equipment be used and hence, needs support?  

A. Longer than you think.

Here are a few examples:

From SunPower, a manufacturer of solar panels

SunPower Corporation (“SunPower”) warrants that for 25 years beginning on the Warranty Start Date1 (the “Warranty Period”), its photovoltaic modules specified above (“PV Module(s)”), shall be free from defects in materials and workmanship under normal application, installation, use and service conditions, and the power output of the PV Modules will be at least 95% of the Minimum Peak Power2 rating for the first 5 years, and declining by no more than 0.4% per year for the following 20 years, so the power output at the end of the final year of the 25 year warranty period will be at least 87% of the Minimum Peak Power rating.  

That is correct – 25 years!  And the buyers have to trust that the seller will be in business at least that long to honor any warranty.

Extracts from IRS Publication 496 (2016) How To Depreciate Property:

3-year property 

  • Tractor units for over-the-road use. 

5-year property

  • Computers and peripheral equipment or any property used in research or experimentation. 

7-year property

  • Agricultural machinery and equipment.

  • Office furniture and fixtures
  • Any property that does not have a class life and has not been designated by law as being in any other class.

10-year property

  • Vessels, barges, tugs, and similar water transportation equipment. 

As you can see, most B2B capital equipment can be depreciated over seven years.  But…

From the Real World

Many products have a useful life that far exceeds the allowed depreciation time.  Some examples are:

  • Machine tools – software, controls, and sensors may undergo upgrades but the motors, castings, and power handling last for a very long time.

  • Analytical equipment – the rate of change of many instrument classes has slowed to a crawl.  There is little room for innovation and even when there is innovation, many labs keep the old stuff because it is “good enough.”  Think scales, mixers, and pipetting equipment.

  • Transportation equipment – think about the age of the US Air Traffic Control System or the jet plane you just flew on.

When companies make a buying decision, they look at the service record and reputation of all the qualified suppliers and ask themselves “will this business be around in 10 to 15 years and will they be ready, willing, and able to service and support this equipment?”  That is why so many IT buyers stick with IBM.  IBM has been servicing its products for over 100 years and no one doubts that they will continue to do it as long as someone will pay.  In other words:

Nobody every got fired for buying IBM

Communicate How You Create Value

You know your solution offers a significant benefit and you have developed real trust with the buying team.  The last step is to communicate the value proposition so the people you are dealing with can become your internal champion.  This is a big deal because everyone is trying to mitigate risk and the internal people will believe the buying team because they don’t know or have a relationship with you.

This is where you pull your story together.  You share your value proposition, the third party ROI calculation, and the service and support history of the selected supplier.  You give them whatever information they require to feel comfortable.  They carry your flag.  Not because they love you but because they need the business results they will obtain from owning and using your products and services.  

If you did your job properly during the whole process, you will receive the order you had forecast, earn whatever emotional and monetary praise you deserve, and be told to go out and do it again.

Babe Ruth Quote

Such is live as a product or services sales professional.

7 Services To Sell To Customers Who Choose In-House Field Service

Sam Klaidman - Monday, March 13, 2017

This post has been one of our most popular posts from 2014 and is still relevent today. If you missed it the first time, or if you just forgot about it, then I hope it strikes a positive note with you.  

Customer Satisfaction Drives Loyalty

Sam Klaidman - Monday, March 06, 2017
The Temkin Group loves to publish insightful information that is very important and easy to get your head around.  They derive this information for what appears to be an endless stream of consumer surveys and they present it in ways that are clear and timely.

In their February 23, 2017 post “Customer Experience Leads to Recommendations (Charts for 20 Industries),” the Temkin Group published two figures, which are the subject of this post. Their post also includes 20 charts, one per major industry, which I am not going to talk about here. You can see them by following the previous link.

This figure shows the impact of Customer Experience (CX) on loyalty:
Impact of Customer Experience on Loyalty

When discussing loyalty, the Temkin Group looks at four outcomes of being loyal; Likely to Repurchase, Recommend, Trust, and Forgive.  Before discussing this further, I am including this figure so you can understand the Temkin Group’s terminology:

Calculation of Loyalty Metrics

The second figure includes the wording of the questions asked about each outcome, the scale used, and how they define “goodness.”  For repurchase, forgive, and trust they use a 6-point scale, with anchors on each end and consider the top two boxes as goodness.  For recommend, they use the NPS 11-point scale and consider the top three boxes to be goodness.  It really doesn’t matter what you consider goodness in your own program, it is only important that you be consistent so you can trend the data and get meaningful results.

Interrupting the Data

I will focus on the Repurchase chart of the first figure to talk through how to think about this data but everything I write is equally applicable to all four areas of loyalty. 

The first point to note is that the chart does not tell us what percent of the respondent’s ratings fell in each of the five satisfaction categories (very poor, poor, okay, good, and excellent) but only the percent of each category that satisfies the requirements defined in the second figure. Also, you should not assume that the percent in each category is higher than any of the lower categories.  Many times, we see that the percent of okay or good exceeds the percent of excellent.

The second point is that the columns represent the percent of responses that are “likely” to repurchase as defined in the second figure.  This means that 86% of everyone who reported having an excellent interaction also rated a six or seven on the likely to repurchase question.  At the other end of the CX scale, 13% of the people who had a very poor experience were also likely to repurchase from the company.

The conclusion here is that the better the customer’s experience, the more likely they are to demonstrate loyal behavior.  For your internal improvement program, I always recommend focusing on the top box, the best choice, instead of considering the top two or three boxes as goodness.  I recommend this because the loyalty percentage would be less if the data was presented for just the top box (which generates the largest loyalty)…why delude yourself?  You should always be looking for the real truth and not giving yourself a false sense of security.

The data also leads us to two questions:

  1. How come 14% of people having an excellent experience would not definitely repurchase?
  2. How come 13% of the people having a very poor experience would definitely repurchase?
Why would very satisfied customers not repurchase?

As you might expect, there are a number of possible reasons:

  • They have no need for another one.  For example, you bought your youngest child a snowsuit and are planning to relocate to the south before the next snow season.
  • You are working for an organization that prohibits you from endorsing a product.  This is very common in both the healthcare industry and in government.
  • You purchased the product in an outlet and have no idea where to go to get it again in the future.
Why would very dissatisfied customers repurchase?

Again, a number of reasons:

  • The supplier has a real or virtual monopoly.  For example, a real monopoly exists in most communities with respect to home water delivery.  Also, many families have only one cable provider.  You may hate them but believe that something is better than nothing.
  • Some communities have multiple cable providers but the cost and hassle of switching means that some customers are dissatisfied and yet will renew their contract when it comes up for renewal.
  • People are loyal to medical professionals even though they run a terrible office.  If you have a “painless” dentist who is never on schedule, you will very likely keep going back because the frustration of sitting in the waiting room is small compared to benefit having a pain-free procedure. 
The results and conclusion can easily be changed

While these examples are real, they are not necessarily permanent.  If a new dentist moves into your area and some of your friends try the new person and are amazed with their experience, then you are highly likely to switch.  I am sure you can construct similar reasons why people would switch for all the examples I just listed.

The point here is that none of us has customers for life. If we don’t think about our customers as being leased instead of being owned, then we are setting ourselves and our business up for a major shock.  

For example, the de Havilland Comet jet made its first commercial flight in 1952 and the Boeing 707 made its first commercial flight in 1957.  The Comet never really caught on and Boeing thought it had cornered the market with the 707.  But by 1972, the first Airbus A300 made its first flight and now Boeing and Airbus equally share the commercial market for large jet transports.  There are no customers for life.

Make Things BetterEven if your product or service is better than your current competition, you are always vulnerable to being eclipsed by someone with either a better product/service or a better experience.  The solution to both is continuous improvement with both your products and services and the way you engage with your customers.

Remember that business is a marathon, not a sprint.

An Introduction to Servitization and PaaS

Sam Klaidman - Monday, February 20, 2017

This is from a Rolls-Royce Press Release dated Oct. 30, 2012:

Rolls-Royce, the global power systems company, today celebrated the 50th anniversary of 'Power-by-the-Hour', its pioneering approach to engine maintenance management that forms the basis of the company's market-leading CorporateCare® service.

‘Power-by-the-Hour', a Rolls-Royce trademark, was invented in 1962 to support the Viper engine on the de Havilland/Hawker Siddeley 125 business jet. A complete engine and accessory replacement service were offered on a fixed-cost-per-flying-hour basis. This aligned the interests of the manufacturer and operator, who only paid for engines that performed well.

Rolls-Royce CorporateCare®, launched in 2002, added a range of additional features. These include Engine Health Monitoring, which tracks on-wing performance using onboard sensors; lease engine access to replace an operator's engine during off-wing maintenance, thereby minimizing downtime; and a global network of authorized maintenance centers to ensure that world-class support is readily available to customers whenever required.

Does this business model actually work?  You bet!  Here are the Rolls Royce financial results for FY 2008 to FY 2015:

Rolls-Royce revenue growth

The aftermarket services, which includes power-by-the-hour, generates more sales than the actual product does.

This is a very early example of Servitization, which Wiktionary defines as “The delivery of a service component as an added value when providing products.”

Another term frequently used when talking about combining products and services is Product as a Service. Here is Simplicable’s definition:

Product-as-a-Service is a business model that provides a service in areas that were traditionally sold as products. A service model provides ongoing interaction with customers including support. Services may also offer the ability to exchange a product on a regular basis for a different or newer model.

The producer gets a regular income stream as services may include monthly subscription fees or usage based charges. Customers may be attracted to service models due to flexibility, enhanced support, lower upfront costs, and reduced risk. For example, a customer who joins a car sharing service doesn't have to worry about maintenance and has reduced upfront costs as compared with buying a car.

And we may as well define the Internet of Things (IoT).  According to the Future Internet Report by UK Future Internet Strategy Group the IoT is:

"An evolving convergent Internet of things and services that are available anywhere, anytime as part of an all-pervasive omnipresent socio–economic fabric, made up of converged services, shared data and an advanced wireless and fixed infrastructure linking people and machines to provide advanced services to business and citizens." 

This means that products will include data collection sensors and computers and the data will be shared over the internet.  The data may be combined with other data (e.g., GPS) to permit an understanding of operational status or micro-environmental activities.  I will not write more about the IoT here because I have written about it here and also here.

Also, I think about Servitization and Product as a Service interchangeably.

Here are two graphics from an unknown, very creative, graphic artist.  They each describe four different business models.  The column labeled On-Premise is the model where the customer owns and maintains the item. SaaS is what I have identified as PaaS.  Enjoy:

Car as a Service

House as a Service

Do the numbers work?

We are talking about a change in business models from the current “sell product then fix it” model. Here is a table that shows the percent of total revenue derived from service for selected large, multinational companies that break out product and service revenues separately. 

Service revenue as a percent of total revenue

Two things worth noting; 1) the GE Industrial Systems segment of GE is investing very heavily in the IoT and the results support and 2) at IBM, the two service business segments together account for almost 2/3 of IBM’s total revenue.  

An example of GE’s experience

There are over 40 sensors on each GE jet engine.  When a 787 Boeing jet flies from London to New York, the engines alone generate over 1TB of data!  When the plane taxis to the gate, the data is uploaded to a GE facility where they do a quick analysis of the performance of each engine looking for any anomalies.  If they find any issues, the airline’s maintenance department is notified and the decision is made about the urgency of any investigation or repairs.  If all is good then GE, in the background, analyzes the performance of all engines of any model and compares each engine’s performance to all similar engines in the airline’s fleet and also to all similar engines flying.  Imagine all the valuable data that GE collects!

Why is Servitization important?

It is extremely difficult for any company to create and maintain a differentiation factor over the long term.  This is because of the Internet, Google, people connected into networks, and the general availability of competitive information. Even if someone patents an innovation, the current selection of available technology means that avoiding patent infringement for a good idea is usually possible.  However, combining a product with unique sensors connected to a central monitoring computer over a proprietary software network is very difficult to copy. And you can charge more because this “system” provides new value to the customers.

Why should service people care?

Aside from the fact that PaaS will create jobs for service people, it also means that they will have to learn new skills and that their travel time will reduce.  The new skills will now involve troubleshooting complex systems from a central location.  The technician will be able to troubleshoot down to the FRU (Field Replaceable Unit) level and whoever is sent to the equipment location will know exactly what the job entails.  The likelihood of a surprise is limited.

Another reason to care is that service will become responsible for a greater percent of total revenue than previously.  Remember the GE Industrial Divisions results in the earlier table.  The spotlight will now shine much brighter on the service team and there will be more accountability for financial results than previously.  Along with accountability comes rewards for doing an outstanding job and there is a downside for a less than sterling performance.  

I believe that all-in-all the service teams of the companies which adapt the PaaS model will enjoy their jobs better than they do today, will learn a lot of new things, and their individual and team performances will be broadly recognized.  I look forward to seeing you on a TV, magazine, or Internet advertisement one day soon.

Your Service Experiences – By Design or By Chance?

Sam Klaidman - Monday, February 06, 2017

Defination of service designWe design our products.  We design our organizations. We spend an inordinate amount of time and money designing our software.  But, do we design our services?  If we were honest, most of us would answer NO!  

This is unacceptable because as Thomas Stewart and Patricia O'Connell write in their 2016 book "Woo, Wow, and Win" - A company's job is to design and deliver delight on its own terms, by fully meeting the expectations of customers." Think about this; consistently meeting customer expectations creates customer delight.

If we don’t design our services, how did they get where they are today?  How do our customers feel about the services we deliver?  Do our services help or hinder future sales?  And, most importantly, how should we go about designing our services?  Let’s take these questions one-at-a-time.

How did our services get to where they are today?

When technology companies start-up, they are only focused on two things; getting investors and shipping their first product.  Anything else is usually too small to show up on their radar screen.  After a while, they have beta units placed with important early adopters and they start getting a very few “service calls.”  Usually, one of the engineers is sent to the customer site. They either fix a silly problem (maybe due to a confusing user interface) or quickly escalate the issue to the engineering team, so they can properly fix the problem and also fix the other beta installations.

Eventually business starts to pick up.  Sales add a Technical Account Manager (TAM), sometimes called an Applications Engineer.  Once they help make a sale, they come back, install the equipment, and train the users.  And when there is a need for someone to do remedial service, the same person is dispatched.  After this gets old, the Sales Management tells the CEO that “I need my TAM’s to grow sales.  You need to set up a Service Group.”

However it happens, the new Service Department (person?) takes over from the TAM’s but continues to do what they were doing.  The new Field Service and Technical Support resources are trained in the existing procedures (I hate to call it a process.)  And so it grows.

In other industries, the growth of the service department may have followed a very different path, but the outcome has been the same – service is delivered the about same way it always has been.  And the results are what they have always been except for implementing new technologies such as remote support.

How do customers feel about our service?

In the majority of cases, the company doesn’t know.  They think they do but it is only a guess. They don’t do surveys and they don’t collect and analyze feedback received by various individuals who interact with customers.

The reality is that some small, long time customers are very happy.  They get good treatment and feel comfortable with the service.  They know what to expect and are rarely disappointed. It is the newer customers who quickly get disappointed.  

The new customers enter the relationship without having their expectations set by their new supplier. They extrapolate experiences from their other suppliers and use them as the expectations for the new one.  For example, assume they have a large number of HP printers serviced by HP Managed Print Services.  They then buy a Xerox printer from a local distributor who will also perform service.  If the distributor never set expectations based on their capabilities and procedures, the buyer will just assume that their new printer will be serviced to the same standards as HP.  A situation that likely leads to disappointment.

Do our services help or hinder future sales?

If you have not taken an outside-in approach and redesigned your services to deliver to people what they want, the way they want it, when they need it, then you are hurting sales.  If your product or service is a monopoly, then you may not be hurting current sales, but it does mean that your customers are always looking for improved products and or services and will change when they see an opportunity.

That’s right – many of your customers will toss out a perfectly good product if you cannot keep it running when they need it.  They will buy another product from a competitor if they believe they will get better service and support.  Remember, the reason they purchased your product is because they needed to use it to achieve their business outcomes.  If it is not working, and you cannot make it work, then it is nothing but an expensive boat anchor.  That’s why there is so much churn in the mobile phone and cable markets.  Change is relatively easy and people have no patience for what they believe is inferior performance.

How should we go about designing our services?

Disney quote about designing experiencesService design is all about figuring out how your customers will experience your services, what experiences you want them to receive, how you will ensure that your business always delivers the desired experiences, and how you communicate the expected experiences to your customers.  In other words, how do you set and deliver a set of expectations that will routinely create value and loyalty for your customers?

How you design each service is like a customer journey map (CJM) on steroids.  When you create a CJM, you identify all the steps your customer’s take in doing whatever they are trying to do.  Then you evaluate how satisfied they are (or probably are) at each step and finally, you figure out how to improve their experience.  What is missing is the first key step – deciding how you want them to feel after taking each step.  And since the individual steps have to make sense when joined into a journey, you have to make sure that each individual journey creates satisfied customers.

Here is a made up example.  Let’s say you are designing a new gas (petrol) delivery system. You know you want to use the existing underground storage tanks so that is a system constraint. Also, you would like to reuse the islands where the fuel dispensers are mounted – a second constraint.  Based on surveys, personal experiences, and dealer feedback, you discover that business falls off during inclement weather and also during extreme temperatures, both high and low.  Also, you learn that customers really like paying for the fuel at the dispenser without walking into the office. 

As you and your team think about the problem, you figure out that customers do not have strong loyalty to a particular fuel brand.  It is a commodity.  What they have is loyalty to a specific location.  Maybe it is easy to enter and leave the station, maybe it is right next to where they stop a few times a week to transact other business, or maybe they go there because it is a habit.  So you decide that if you can create a simple system which works well in all types of weather, you can provide a great experience and shift customer loyalty to your newly designed stations.

I won’t create a new design because that is not my strength but let’s assume we find a way to shelter the customer from rain and snow, provide shade from the direct sun, and blow hot or cold air at the point where the hose is attached to the car.  Let's further assume that these individual steps are highly reliable and automatic.  Automatic means that when you insert the nozzle into the car’s fill tube, a steady stream of comfortable air will blow to that same point. You also find a way to speed up the end of sale payment process and that the customer stays dry and comfortable while waiting for the receipt.

If you installed my futuristic fuelling system, I would bet that your business would increase because of the creature comforts you provided.  And customers would no doubt be willing to pay a few cents per gallon more because the experience is so pleasant.  

That is service design.  You can, and should, do the same thing with how your call center works, how you create, dispatch, and confirm a field dispatch, and all the other interactions you have with your customers.  And you should tell them exactly what to expect for each step and what to do if things do not exactly follow your plan.  Within a few months, you will start seeing an increase in CSAT and an uptick in business.

Make this a fun experience for you and your team.  That’s how innovation starts.

The Importance Of First Time Fix Rate

Sam Klaidman - Monday, January 23, 2017

Most Field Service organizations closely monitor their first-time fix rate (FTFR), which Aberdeen defines as:

The resolution of a work order/customer issue on the first service visit.  Any repeat visit, secondary truck roll, or service call cannot be for the same issue. 

While this definition is generally accepted and will be used in this post, at the end of this post I offer another definition that is slightly stricter and will cause you to focus improvement efforts on additional issues.

Why does FTF matter?

Aberdeen published this chart showing the major Field Service goals sorted into two categories; those companies with first-time fix rate greater than 71% and those with FTR at or below 70%. 

Goals for Field Service

From this chart, we can conclude that a 70% FTFR is approximately average.  Note that organizations with the 71+% FTFR have set improve response time and reducing costs by managing repeat visits as a much less important goal than those with a lower rate.  However, the high FTFR folks are still focusing on improving CSAT and increasing revenue.

Let's look at the four goals

Improving FTR improves customer satisfaction - As this chart, from TSIA shows, over a narrow range, there is a strong correlation between FTFR and CSAT.  

First time fix rate and CSAT 

If you are trying to increase your Overall CSAT, then a 0.2 change is a big deal!

Increase revenue – When you have to send a field engineer back for a second visit, she may be earning revenue for a billable call but is not earning as much as if she were going to a new customer.  That is because your company probably caused the repeat visit and you should not be billing for all the cost of the visit.

Reduce costs – This is the jackpot!  If your engineer is performing an installation, warranty call, or contract call, the labor, travel, meals, etc. all get charged to your expense account.  If your organization is small and you frequently fly engineers from call to call, then these costs can mount very quickly.  For example, if you assume that any flight segment costs $500, and your engineers fly from city to city, then the re-visit costs one extra segment plus possibly a car, hotel and extra meals.  Over the course of a year that can become a budget buster!

Improve Response Time – This is easy.  When your engineers are all fully booked with jobs, including repeat visits, then response time for new calls declines.  There goes your CSAT.

What causes re-visits?

Revisits are sad because the majority of them can be prevented!  Here is Aberdeen’s analysis of their survey data:  

  • Parts unavailability (i.e., incorrect or no part available) – 29%
  • Customer/asset not available for service – 28%
  • Improper diagnosis at time of dispatch – 19%
  • Technician did not have right skills – 15%
  • Resolution was only temporary – 8%
If you think about each of the reasons for a revisit you will come to the same conclusion that I did – Improper diagnosis at the time of dispatch is a major contributor to the lack of parts and technicians with the wrong skills. If the person providing phone support to the customer was confident in his diagnosis, he would absolutely make sure that any and all possible required parts would be available when the “right” engineer arrived at the customer.

Dispatching an improperly trained engineer is primarily a management issue.  Field engineers must be trained before they are dispatched to customers.  If they are not fully trained, they must know how to perform most diagnostics and have the skills to work with a remote technical support person while on site. When an untrained engineer is dispatched, it is frequently because the support person made a decision that anyone who arrives to fix the problem is better than having the customer wait.  This is never a good situation to be in and in this case, the customer, dispatcher, and engineer are all going to be dissatisfied. In other words, everyone loses!

Either the design of the service experience or the engineer’s training are also responsible for most of the cases where the customer or the asset is not available.  The way to minimize this situation is to have the engineer directly contact the customer and make sure both the asset and the person will be available when the engineer believes he will show up.  The engineer must contact the customer at least once more before arriving – to either confirm the arrival time or to change it if necessary.  This is both common courtesy and good business.

Who should own FTFR?

This is a major field service KPI (Key Performance Indicator) and belongs to the Head of Service.  However, the Field Service (FS) Manager has a responsibility to make sure the field team is properly trained and to coordinate with the technical support and logistics managers to ensure that the organization (and the engineers) have a very high chance of making each service visit positive for all parties.  This is such an important measurement that I recommend making the three managers equally responsible for this KPI and making it an important, and equal, part of each person’s variable compensation.

I know that I did not include the Training Manager in this discussion since that person has a significant role to play. I believe that the FS Manager has to make sure the engineers are properly trained and so should be coordinating with the Training Manager and making the engineers available when the Training Manager calls for them.

Change FTF to Clean FTF

If your engineers are being dispatched for more than one service call a day, then FTFR is a perfectly good metric.  This occurs when servicing printers, copiers, office equipment, some “small” medical devices, and relatively uncomplicated industrial and laboratory instruments. But when the service call is designed to spill over to two or more days, then I like a different measurement.  I call it the “clean” visit.

Let me explain.  A multi-day service call can result in a first-time fix even though the engineer, the customer, and the service center have to perform heroic efforts to finish the job.  Let's say that a field engineer needs a part that she does not have or has not been sent ahead.  She calls back to the dispatcher who determines that there are none available in the stockroom.  They then discover that one was recently sent to another engineer in another city.  He gets a call and confirms that he has it and does not need it for current jobs.

The engineer has to interrupt his work and tell his customer that he has to leave for an hour or so.  He takes the part to FedEx and ships it overnight.  When the shipping engineer returns to his original job, he finds out that the customer has left for the day and the engineer has to return the next day.  That wasted two hours on the current day.  The next day the first engineer has to go to the FedEx location to pick up the part and head to his customer.  She arrives later than the customer expected because of the delay in picking up the part.  The job gets completed and the service engineer reports the first-time fix.  But two engineers and two customers were interrupted and though the service organization was slightly out of control.

Lesson learned

Unless all disruptions to smooth work are identified, analyzed, and corrected, the service organization will always be disappointing customers and making their field teams lives miserable.

For extended jobs, please seriously consider using the clean visit as the metric to monitor.
If you have a low FTFR and do not have the bandwidth to identify and solve the problems causing the poor performance, please contact me.  We can start with a complimentary one-hour conversation to see if we should further investigate working together on this challenge. 

Boston Web Designer